Start-up capital for technology companies

April 10, 2008

You have the idea - but how do you obtain the funding, particularly as the initial scramble to invest in technology stocks has now died away?

Sources of finance:

Traditional lenders such as banks (especially in the current economic climate) are likely to be reluctant to invest in technology companies with little or no trading history. Most technology companies therefore seek an injection of funds by way of an equity investment, usually through a venture capitalist or other "business angel" (usually a high net worth individual). There are a number of investment funds which specialise in technology stocks - they are, however, increasingly discerning as to the companies they invest in.

Setting yourself apart from the crowd

It is not just your business proposition which sets you apart from the crowd. Potential investors want to see that an entrepreneur has taken the trouble to evaluate the arena in which the new business will operate. The importance of a well produced business plan cannot be overstated. Any investor will base its decision to invest, in large part, on the strength and quality of the business plan. Equity investors receive numerous investment proposals - taking the time and effort to prepare a detailed business plan can give you a significant head start.

The business plan should cover the fundamentals of the business proposal - the areas which should be dealt with include:

Many entrepreneurs are surprised at the degree of control they are forced to relinquish to their investors. An equity investor will usually require a seat on the board together with rights of veto over many key "strategic" and other issues, such as annual budgets, senior management recruitment and borrowing. In addition, an equity investor will often request provisions in the investment agreement which will allow it to "force" an exit and compulsorily require other shareholders to sell their shares in certain circumstances.

Other alternatives:

The boom in technology companies has led to new developments in venture capital funds. A number of "incubator" services for technology entrepreneurs have now been launched - at least one of the big give accountants has recently launched such a service across Europe. The incubator fund will often take equity in lieu of fees and will provide strategic advice to the new venture, including taxation, accounting and technological expertise. The incubator fund will also assist in developing a coherent strategy from an initial start-up through to an eventual exit.